Tuesday, June 2, 2009

SPY and the big purple crayons

What's the long view of this market? I was reviewing the wisdom of the venerable market technician John Murphy who reminds us of the importance of weekly charts. He also puts emphasis on MACD and Volume, both of which I use (so maybe I have absorbed something.) I am impressed by how few trading sites take longer views of the indices, and it seems even more helpful now that the perturbation of the Fall is finally abating and we have a renewed need to factor in last summer and the previous year. I'll start with the SPY.

SPY weekly. Sure we had this massive deleveraging when everyone (myself included) thought Armageddon was a possibility, but the markets have settled somewhat and now we are approaching a significant downward trendline. This picks up from last summer when the SPY was already showing some signs of weakness. Now SPY is at the 200-d MA and approaching the big trendline... if it breaks through, this would be significant.

The horizontal line (sorry, Eric) represents overhead resistance and we have broken through this already, and this should act as support. Murphy says that the time to buy is when the market is at support, and by all definitions that is exactly where we are now.

Another item I did not put on the chart is that the 38% Fibonacci retracement from the October 2007 market high is 102-ish.

Let's review the signs: Overhead resistance breakout, now support (yes), 200-d MA breakout (yes), Long term down trend breakout (not yet), 38% Fib from high (not yet, and this may be where we get turned away at 102).

Murphy also likes to look at the MACD and the rule is that the market is bullish as long as the fast line is above the slow line (it is) and both are below zero (they are). The histogram, for the record, is showing bullish divergence on the weekly.

One last thing of importance is the volume. Yes this bull run (or counter trend rally) has been on lower volume when compared to the Fall... BUT one could argue the Fall was a massive dislocation with highly levered fund managers dumping shares in order to raise capital, so of course the volume was crazy. Compared to a year ago, however, the volume is on par.

While we obviously cannot ignore completely the face-raking that happened in the Fall, if one were to cover up the chart from September to March or even to May, one would see a different picture: A bear market to be sure, but one that is at significant support/resistance levels and can go higher if the recent trend follows the weekly technical signs.

SPY daily. Let's drill down to the daily charts and see that big red trend line looming. Also remember the 38% Fib level from the Oct 2007 high is 102 (not on the chart).

MACD, histogram and volume are not as pretty from a bullish scenario, but by the same token they are not screaming "sell" either. And remember, Murphy says "weekly signals take precedence over daily signals [on the MACD]."